INVESTING IT

When Boards Say 'No Deal' To Holders

By REED ABELSON

Published: October 6, 1996

IMAGINE that somebody knocks on your door and offers to buy your house for more than you thought it was worth. You want to take the money, but your real estate broker prevents you, insisting that the price will go up. A year passes, and you're still waiting.

Shareholders often find themselves caught in a similar conundrum, with this difference: while a real estate broker can't block the sale of a home, a board of directors can -- and these days increasingly does -- slam the door on an unsolicited bid for a company, even when shareholders favor the deal.

That is what happened at Wallace Computer Services Inc. of Hillside, Ill. One year after its board rejected an offer of $30 a share, adjusted for a recent stock split, from the Moore Corporation, a rival office-supply company based in Toronto, the stock is languishing in the $28 range, closing Friday at $28.625. Shareholders, who overwhelmingly supported the offer, tendering nearly three-fourths of all shares outstanding at one point, are out at least $74 million. They may be out much more, since Moore might well have raised its bid had Wallace bothered to negotiate instead of adopting a poison pill to thwart the unwelcome advances.

Moreover, shareholders could have been reinvesting that money in a market that has risen about 20 percent.

''If history runs true to form, the shareholders of Wallace were probably ill served by the board's decision,'' said Joseph A. Grundfest, a former commissioner with the Securities and Exchange Commission who is now a securities law professor at Stanford University.

Wallace's shareholders are not the only ones waiting. When Paramount Communications made a play for Time Inc. in the late 1980's, Time refused an offer of $200 a share -- or $50 adjusted for a subsequent stock split. Seven years have passed, and the price of Time Warner Inc., created in a 1989 merger of Time and Warner Communications, closed Friday at $39.50. And shareholders of the insurance company Unitrin Inc. have been waiting two years for their stock to trade significantly above the $50.375 a share offered by American General.

What's going on here? As a company's owners, aren't shareholders supposed to be the final arbiters of its fate? Not exactly, it seems. A Federal court in the business-friendly state of Delaware ruled last December, in a lawsuit filed by Moore against Wallace, that a company's board of directors can overrule shareholders in takeover battles as long as it makes a reasonable assessment of the company's potential value.

''It is by far the strongest decision by the Delaware court on the just-say-no defense,'' said Andrew G. T. Moore 2d, a former Delaware Supreme Court judge who is now a senior managing director for the investment banking firm Wasserstein, Perella & Company.

While previous court rulings had established the primacy of the boards, this one heartened corporate executives and their boards across the country by giving them new ammunition to withstand hostile bids. At the same time, of course, it angered proponents of shareholders' rights and others with stakes in the outcome of takeover fights. Since it was issued, a growing number of companies have simply refused to negotiate with suitors. The Circon Corporation, a medical-technology company, for example, is snubbing an $18-a-share offer by the United States Surgical Corporation, even though the stock was below $10 before the offer and a majority of the shares have been tendered in support of the purchase.

MORE than just sending a comforting signal to corporate board rooms, the ruling by Judge Murray Schwartz of the United States District Court in Wilmington has provoked a heated and often convoluted debate that goes to the heart of one of the great riddles of the corporate marketplace: Who should ultimately determine a company's intrinsic, long-term worth, as opposed to its day-to-day stock market valuation?

Should it be the directors, who have a fiduciary duty to make the right decision but who also tend to circle the wagons whenever their salaries and perquisites are threatened? Should it be the company's investment bankers, who have the expertise to weigh all the factors but who also may have a vested interest in keeping the managements happy? Should it be shareholders, who own the company but may be uninformed about all the factors affecting its worth? Or professional investors, like arbitrageurs, who jump into takeover frays in hopes of making a quick buck? Or Federal or state judges, trained in the intricacies of the law but ill equipped to act as stock market analysts?

For the moment, boards have the upper hand. But while directors are supposed to represent the interests of shareholders, critics say they often seem more than willing to thwart the owners' wishes, often because their portfolios are not on the line: Wallace's board and top officers, for example, collectively own just 2 percent of the company's shares.

Boards justify their actions by invoking the recommendations of the investment bank hired by management as an ''independent expert'' to evaluate an offer. Wallace's board relied heavily on the opinion of Goldman, Sachs & Company, which frequently advises companies fending off unwanted suitors. Once Goldman deemed the offer too low, the board was able to refuse Moore's offer and shareholders were powerless to do anything except elect three of Moore's nominees to the board. Defeated, Moore announced last August that it was no longer interested in acquiring Wallace.